The Next Wave of SMB SaaS: True Solutions. Priced as Such.

Screen Shot 2014-07-05 at 9.20.47 AMIf you look at the SaaS companies that have IPO’d to date, you’ll see one common theme:  almost all sell to Large Enterprises, either almost entirely (Veeva, Workday), mainly (Salesforce, Cornerstone), or in large part (Box, coming).

It just makes sense.  The reason isn’t just because Large Enterprises have more money.  In fact, as a group, they don’t.  As a group, small businesses spend far more that the Fortune 500.  And there are, of course, far more of them.

No, there are three simple reasons SaaS IPOs to date are all centered around Large Enterprise Customers:

  • The have existing budgets
  • for Solutions to Large Problems
  • that are worth spending $X00,000 a year or more to solve.

Get just 500 Large Enterprises to spend $250,000 a year to solve a large problem … and that’s a $125,000,000 business and an IPO.  $250,000 is nothing in the Enterprise — it’s less than the cost of one person, fully burdened.  So that’s where the money has been the past few years in SaaS 2.0.

And it’s even “easier” than that.  When I was a Corporate VP at a Fortune 500 Tech Company, I couldn’t get $5 a month to expense a DropBox or Evernote account.  That would require way too much work, too many corporate approvals.  And the last thing I wanted was hundreds of rogue employees expensing tons of applications on their own.  Huge administrative headache for me as a Corporate VP, with no personal gain.

But $250k a year for say CIO-approved Box instead?  Not a problem if it solved a large problem for me.  Because as a corporate VP, you have a large albeit fixed budget to solve big problems.  The reason is people.  In a Big Co, you can’t get anyone to build anything, and even if they do, it takes 2-3 people 18 months.  On a fully burdened basis, that’s $500,000 right there.

So as a Large Enterprise Corporate VP, you have to have a budget to solve big problems (e.g., Billing, CRM, ERP, Content Management, Talent, etc.) because it’s far cheaper and more effective than any attempt to tackle them in-house.

Beyond that, so far, it’s been easier to sell to the Large Enterprise because They Have a Person.  Be it someone in the CIO’s office leading technology innovation, or a Director of Operations or Technology looking to bring the best solutions and tools in-house, there is always someone.  Someone dedicated to looking for and implementing the next set of productivity apps.  Versus nobody in a 50-person company.  Nobody in a 50-person company is 100%, or even 10%, dedicated to bring innovation into the company.

So let’s compare the Enterprise buyers above that to your average SMB today:

  • No defined budget
  • Buying lots of tools and cheap software (e.g., Quickbooks, Freshbooks, etc.) but very few Solutions
  • Probably have never spent more than $100-$1000 a year on an individual piece of web software before, if anything.
  • No one with time or bandwidth to implement or even look for new solutions in most cases.

Sounds like a recipe for failure, doesn’t it?

Certainly, I can tell you, in ’08 it was.

But finally, it’s changing.  SMBs are not early adopters, at least not of solutions (vs. tools).  Getting a small business to decided to pay $300 a month for your web service is not a light decision, unless it’s just automating functions they already pay for (e.g., Zenefits, Xero, Freshbooks, etc.).

What I’ve seen over the past 10 months or so is over a dozen truly world-class next-generation SaaS start-ups that have, finally, convinced small businesses in specific verticals to pay $300 a month or more for a true solution to truly run their small enterprise on.  Not just a tool.  But, the app they are in 8-10 times a day, in the office, on the road, wherever.  The app that runs on a flatscreen on the shop floor, all day long, for everyone to see, everyone to use.

Now the math gets interesting:

  • To build a $100m business on a $5 a month freemium tool, you need 2,000,000 paying customers.  Congrats to DropBox and SurveyMonkey.  But who else is pulling this off?  Not too many.
  • To build a $100m business selling to SMBs at $300 a month, you need ~25,000 paying SMB customers.  A lot.  But achievable.  If you dominate a large vertical, especially.
  • In fact, it’s easy to see, 5-7 years down the road — 15-20 $100m+ ARR winners here.  All selling verticalized solutions to SMBs.  It’s, finally, time.

The Rise of the SMB SaaS Solution.

So what are my learnings, what’s actionable for you?

1-/  If you selling to SMBs, maybe, don’t get trapped in the middle.  $30 a month is stuck between a tool and a solution.  Think about how to make your app indispensible, all day long.  Something that will seem cheap at $300 a month.  By being the system of record, the core business process engine, of your customers.

2-/  If you’re at Initial Traction ($1.Xm ARR) – hang in there.  It’s just getting good.  I know some people will not get how your SaaS for the SMBs in XYZ Industry will ever get to $100m ARR.  They’ll say it must be too small.  But they will be wrong.  TAM is what you make of it.  If you can get from $1.5m to $10m in 6 quarters or less — you have a huge market.  Ignore the doubters and haters.  They were right in ’08.  They will be miserably wrong in ’18.

3-/  Start to Get Paranoid About the Competition.  The flip side of SMB’s being slow to adopt true solutions is that the competition hasn’t been that fierce.  Many of these SMB solutions that are getting to seven figure run rates … aren’t that great, from a software perspective.  They’re good enough.  They solve the problem.  But they aren’t great.  That may be OK.  Because many of these apps are really competing with paper, Excel and email.

But if you’re starting from scratch today, you’re going to have to be truly world class.  A few years ago, maybe not.  You can’t do an SMB vertical (or otherwise) solution today that isn’t great.  As the markets grow, as the numbers increase, the competition increases in number and quality.

 

image from here

 

27 comments

  1. Very insightful article, thanks for sharing!

    One question: How big should a SMB vertical be to enable a venture to grow to $100M ARR within 7 years compared to an enterprise vertical? Should it be bigger than the respective enterpise vertical?

    • I don’t think it matters … per se … If you can get to $2m+ ARR in < 24 mos, you'll have enough underlying velocity in the business to have at least the potential to hit $100m ARR …

  2. Great source of knowledge as always.

    Jason, do you think $300/month is an optimum or minimum price for SMB in order for SaaS business to be successful?

    • I think it’s a minimum ACV. Not optimum. You can go higher. But below that, you can’t do traditional inside sales. Below that, you need too many customers. But maybe most importantly, below that … I’m not sure you’ve provided true solution-level valuation to the business.

      • If I got you right, $300 ACV (annual contract value) is a minimum. $300/month is $3600 ACV which can lead to 100M with 25K customers (with that we can use inbound sales). This really helps in segmenting the customers.

  3. Pingback: SMB SaaS Solutions: Choose depth OR breadth, but not both | Random Wafflings

  4. I disagree with a lot of this. I don’t think you can have breadth AND depth in a software product. I’ve elaborated at http://ukstartups.com/no-complete-smb-solution/

    • Good to have disagreement! But I think I agree with the highlight. You can’t have both. True SMB Solutions have depth usually in one core area, and then weaker breadth in adjacent areas, where those extra functions really become features.

  5. This is great post on the value of solving very targeted (and hopefully big) pain points for your target buyer. While this may just be semantics, I do have an issue with the definition of ‘solutions’ however. Despite the advent of technology, ‘true’ solutions still require a significant services component. If you are still small, no large systems integrator will pay attention and your investors will most likely not support you building a services business. The key IMHO is to figure out how to deliver a ‘solution’ to a problem that does NOT require a significant services component.

    • I agree completely Ted. An enterprise ‘solution’ for an SMB by its very nature will have a fairly high degree of implementation complexity. The assurance of adoption and renewal will very likely require a generous helping of expensive services, training and support.

      • Is it possible to build a business solution for an SMB that requires very little implementation or support service? Or is it possible to automate much of this? And what are the risks of automating customer success. I think its a fine line to walk here.

      • How would you define a significant services component? How much would you say is OK to spend on services per year for a $10k+ ARR customer?

      • For example our Saas business is a strategy execution platform for the SMB market. For a customer that spends 10K / year in software licence fees we spend very close to half that in first year services.

  6. Good post Jason. Let’s say your smb focused startup started landing deals outside of the smb space in mid market and enterprise accounts. What are the key indicators you would look for to start shifting your product/marketing/sales efforts outside of the smb space? Would it be something like a % of ARR that is coming from those new segments?

  7. David

    Hi Jason, any chance of you naming those dozen or so true solutions for running a small enterprise please?

  8. Great article as usual, Jason. How would you classify between a tool and a solution? Is it how embedded your product is in their business operations, or your product covering more than just a niche area?

  9. Great post! – Question for you: How do you define SMB vs. Enterprise (in dollars). Is SMB under $50mil/year, $500m/year? Does a $10mil/year have trouble spending $300/mo?

  10. There is a chink in your armor for your argument that “all SaaS companies going IPO sell to large enterprises” as you have left out the suffix “at the time of going IPO” in this statement.

    When most of these companies – most famously Salesforce.com, the original SaaS company – started off, they sold only to small enterprises (the classic “disrupt from below” model), graduated to winning teams within large enterprises as customers and only then moved up to selling to large enterprises directly.

    Given this history, your entire post seems sophistic – on the contrary, there aren’t too many SaaS providers who started off selling only to large enterprises

  11. Great post Jason. Right on spot with the system of record and platform vs.tool to the SMB. The 300-500 price point is right there. In our business it is the price of a single service call. One mention is the lack of mobility around SaaS apps that will and also build out in the next 24-36 months. Its a land grab, and will get fierce and more competitive. But for now its first to the finish line.

    • Yeah. I’ve come to believe there is no real land grab in SaaS, not really. Third-to-Market is often the winner. 10th is tough though until the paradigm changes.

  12. ronbabich

    Reblogged this on Mobility in Construction and Services and commented:
    Good touch on changing SaaS adopters. Reference numbers at http://www.mobile-logix.com/

  13. Nathan

    If you look at the incredible success of Bitrix24 (or their clones), I’d say we are already there.

  14. Jason, good article, but I think you’re excluding a number of important economics that differentiate the enterprise customer from SMB.

    Enterprise customers tend to be tougher to enter, but they are much more sticky and entrenched customers (lower attrition). Solutions to enterprise imply multiple products and services, which increase the opportunity for cross-sell and up-sell. And, enterprise customer contracts rationalize more face-to-face selling and higher-priced and higher-value sales forces.

    True SMB selling, IMO, is closer to B2C selling with greater emphasis on marketing-driven demand generation and highly-scalable tele-based and e-commerce-driven selling routes. Cost of acquisition is absolutely critical differentiator to get correct, and minimizing attrition is a key metric, which again, tends to be higher than the enterprise, as SMB is riddled with credit and payment risk.

    Would be interesting to look at a company like Salesforce (CRM) to see where, in fact, they really make most of their profit. My guess is that 80% of their profit is generated from their top 20% enterprise customers, even though the application was originally engineered for a scalable SMB push. There’s money to be made in SMB, but it’s a totally different animal to conquer.

  15. I haven’t seen any SaaS apps that I would label as a ‘solution’. The solution is a system and the SaaS app is a tool to implement that system (I welcome being shot down on this). For SMBs who are (not always, but often) light on systematization, not only do they need the tools, they need the systems in place to make use of the tools.

    Take Infusionsoft (IS) for example. They cater almost exclusively to the SMB crowd. To many of their customers, they’re not just selling IS the software, they’re selling the concept of marketing automation.

    I’ve heard time and time again how ‘hard’ IS is to learn. I find it’s less that IS is hard to learn, it’s that it’s hard to design and implement the systems that IS systematizes. That takes a HUGE amount of hand-holding and training…

    Can IS afford that hand-holding? I doubt it… but it turns out they don’t have to. There’s an ever-expanding market of consultants who make pretty good coin helping their clients not only use IS (learn what buttons do what) but actually design marketing systems and implement them with the software…

    It gets me thinking whether a trend of the future will be the marriage of SaaS companies, who provide the tools, and consultants who step in to take on the VITAL role of customer ‘success’.

  16. Thanks Jason, very helpful. I believe the trend of persuading SMBs to buy latest and greatest solutions/tools is only going to speed up further. Its primarily driven by change of guard at the helm of these businesses. The new owners/managers of SMBs are much more tech savvy and forward looking due their personal exposure to mobile and web technologies growing up. We are seeing this in developing countries too.

    I agree that competition will be fierce, whatever you charge for in SMBs is constantly under attack. Even being a solution is not enough. But for startups this acceleration of adoption of SaaS solutions/tools is still a good thing…as they can now attempt to create a track towards larger enterprises by first hitting the stride with progressive SMBs. My guess is that companies like Workday also didn’t start with enterprises on day one given at minimum 6 month sales cycles in large companies.

    Would you agree that given price pressures on SMB side of the business for a long term sustainability and for being a $100M ARR business you have to build a track towards enterprises? If yes, any advice on when in the life of startup this transition makes sense. Any proven examples would be great.

  17. Pingback: The Best of SaaStr: Our Top 100 Posts, Organized by Topic (Sales, Marketing, Customer Success, etc.) | saastr

  18. Pingback: Are small businesses doomed to fail, or can SaaS help? | On SaaS Products

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